Coles Myer rejects takeover bid

Retail giant Coles Myer has knocked back a takeover bid by a large American led consortium.

Transcript

ALI MOORE: Well, as we just said, Coles Myer has rejected a private equity offer of $14.50 a share for the company. In a statement issued after the market closed this afternoon, the Coles Myer board said the offer was highly conditional, substantially undervalued the company, subject to unspecified due diligence, and offered no certainty on proposed financing. In its defence, board chairman, Rick Allott, claimed the company is poised to deliver higher profits. He said the board has no intention of handing across billions of dollars of value to a third party. To look at what the rejection means and what's likely to happen next, I spoke with David Halliday from Macquarie Bank.

David Halliday, thanks for joining us. Highly conditional, undervalues the company, rejected by the Coles Myer board: Just the end of round one?

DAVID HALLIDAY: It seems to be the case. I don't think anyone expected the Coles board to immediately accept the first offer that was put on the table. They probably weren't left with a lot of choice. I mean, I think shareholders would have asked questions if they immediately rolled over to the first offer they had received. Where we go from here is certainly going to be very interesting though.

ALI MOORE: But you'd have to assume that there is more in the spreadsheet. How much more?

DAVID HALLIDAY: Well, I think from this private equity bid at the moment, they've put their cards on the table and shown the market that they're prepared to pay 14.50. It's unlikely, I think, that these guys will come back with a higher offer against that in the short term. The question probably more becomes will this bid become hostile. Private equity firms, by nature, are generally not willing to make hostile takeover bids, they'd much prefer to do things with board approval. Given the fact they haven't got board approval, the question now becomes do they make a hostile bid and try and get the shares in that way.

ALI MOORE: That would be very unusual though, as you said. Isn't it more likely that they'd try and come to some sort of negotiated arrangement?

DAVID HALLIDAY: Yes, but it all comes down to the valuation metrics at the end of the day. They've obviously gone away and done their numbers, albeit not from inside the company, and had a look at how much they believe they can pay. They've made, to the board, what they believe to be a fair offer, and that's some $17 billion. It's about $5 billion ahead of where the company was valued at some two months ago. In the absence of them being able to get into the company and to be able to look for more detail and more reasons to be able to pay more money, I think it's unlikely we're going to see them come back with a higher bid in the short term.

ALI MOORE: It's also unlikely, I assume though, that Coles Myer will change its mind without any more money on the table?

DAVID HALLIDAY: Absolutely not. I mean the Coles Myer board have now put a stake in the ground as to what they won't accept. The challenge now for the Coles Myer board is that, as I said, their share price was trading at some $10.60 after they announced their new strategy at the end of July. If the share price does pull back and we see $2 billion or $3 billion wiped off the market cap, the board has certainly got the job ahead of them to try and recreate that value for shareholders over the next six, 12, 18 months, whatever the time period may be.

ALI MOORE: So this could now be a very long game. Is it possible that we won't see any action for months?

DAVID HALLIDAY: More than possible. The next milestone, or the next date that we'll be watching for is 21 September. That's when the company releases their results. They have said, at that time, that they will provide some more detail about the drivers for the growth that they have promised as part of their five year plan that was announced in July. The thing that most analysts in the market were concerned about with that five year plan, before the private equity bid arrived, was that there just wasn't enough detail about the financial forecasts going forward. That made it very hard for the market to model the company going and come up with what they saw as fair value for the company in current environment. So possibly if we get some more detail at 21 September, that might be a catalyst for the share price to keep moving upwards.

ALI MOORE: Are you surprised that this is how it's, sort of, panned out?

DAVID HALLIDAY: It's probably surprising that they have knocked back $14.50. As I said, the company was only valued at 12 billion a couple of months ago. To knock back 5 billion of incremental value over two months shows a lot of confidence, in one sense, from the board that they can recreate that value in their own way, with their new strategy and with the plans they have going forward. But it's also quite bold because shareholders would have reason to be concerned if that can't be recreated in the short term.

ALI MOORE: We'll have to wait and see. David Halliday, thank you very much for your time. Coles Myer shares closed, before today's rejection, at $13.71; down almost 1 per cent.